Of fawda, fields and Faber

Dr Doom says realty and agri-commodities will outperform stocks. Jhunjhunwalla has another take....

by N Sundaresha Subramanian - DNA Money

“Go buy yourself a piece of land — which street, which city I can’t tell you — and learn to drive a tractor”. That’s the advice investment guru Marc Faber had for investors at a recent event organised by Reliance Mutual Fund. “At the end of the day, we all will make losses in equities,” he added.

Dr Doom was just living up to his name. The author of widely read investment newsletter, ‘Gloom, Doom and Boom’ said the Indian equity markets will not grow as fast as it has grown in the last five years and that real estate and agricultural commodities will outperform equities in the future, he said.

Faber said the global economic expansion that began in 2001 in the US is continuing. Historically, the average period of such expansions has been around 44 months. But the current expansion has lasted 68 months.

“This is the first synchronised global boom in 200 years of capitalism, where every part of the global economy has benefited,” he said. Explaining the phenomenon, Faber said the US government’s series of expansionary policies, including the reduction of interest rates from a high of 6.5% in 2001 to 1% in 2003, kicked off production activity in China leading to a rapid industrialisation there. This in turn created a heavy domestic demand in China for goods and services, which was catered to by the developing countries. The Chinese appetite also drove the demand for oil and agricultural commodities, which led to a boom in Africa and Latin America. The demand for capital goods in these countries due to increased prosperity was met by Europe and Japan.

No doubt, it is boom everywhere, but how sustainable is the boom? Not very, he predicts. He sees some trouble brewing in the US housing market. The sub prime lending has gone up considerably in the last few years. Even big players like GE Capital are into it. Any collapse here would bring down the housing market, eventually leading to larger trade disruptions.

But there is some consolation for local investors as an US disruption may not have the same effect here as it would have had some years ago. “The US is more dependent on Asia than Asia is on the US. Today Asia by itself is a larger economic block than the US. If there is a trade disruption, the US will suffer more,” Faber opined.
Emerging economies are not the poor cousins anymore. The tidal wave of liquidity unleashed by the US has flooded the coffers of central banks in these countries with huge forex reserves. Meanwhile, the US current account deficit has run up from a low of 2% in 1998 to 8% now. “This has created a unique situation where the poor countries are financing the expansion of rich ones. Therefore, a repetition of the Asian crisis of 1997 is out of question,” Faber said referring to the crisis when the tiger economies of East Asia collapsed following the sudden and heavy reversal of foreign capital flows.

He punctured the euphoria of audience that was upbeat after the Sensex briefly scaled the 15000 peak on Friday. India is not preferable as it has already run up so much. “The markets have run up 500% in the last 5 years or so — from 3000 to 15000 levels. In the next five years, one may expect it to double to 30000. That is around 20% growth a year.”

The audience would have discounted this knowing Faber, but what followed was scarier: “If I measure the Indian markets in dollar terms, between the peak in 1994 and now, one has actually lost money. The Indian market is at 50% of what it was in 1994.”

The audience took it in the stride, not big bull Rakesh Jhunjhunwalla, who took the microphone after Faber.

Disputing Faber and saying that “anything Asian will go up”, he deadpanned: “The next time someone calls Faber, they should ask him to speak on nightlife and bar girls, rather than the stock markets”